SPECIALS
The Life and Times of a Baltimore Lover

By Nigel Roberts
March 22, 2001

Life has been very difficult for investors in technology recently, with the FTSE techMark 100 index down 60% from its high and many former tech-stock magic shares having shown even bigger falls. Investors in technology and growth should always expect a bumpy ride, but no one could have foreseen what has happened over the last two years or so.

I thought it would be interesting to chart the history of a tech investment over the last couple of years, showing the euphoria and the gloom, and try to draw some conclusions. Have a look at the share price graph of Baltimore (LSE: BLM) and see what a rollercoaster ride it has been.

Diary of a Baltimore Investor

January 1999 -- I first came across Baltimore when the company was called Zergo. The shares had just risen by 68% in the month to 468p (equivalent to a split-adjusted 46.8p). I wrote an article about the company, discussing the big rise.

At the time I noted that "It is likely that the company will seek a Nasdaq listing in the near future. The US is the biggest e-commerce market and it will be important for the company to gain a significant share of business in the US. They will be pushing to increase their visibility in the US and a Nasdaq listing would assist them in increasing their profile, as well as providing them with access to more funds." I also warned that "It is likely that the share price will be volatile," but I didn't realise how volatile it would be!

I was quite impressed with the company and pretty soon after discovering it I bought a modest amount of shares at £5 (equivalent to a split-adjusted 50p).

October 1999 – the share price of Baltimore had gone into orbit, reaching £15 (equivalent to a split-adjusted 150p) and I wrote "Baltimore has been an incredible success story. Since writing the first article about them in January the shares have increased from 468p to reach a high earlier this month of 1700p -- an increase of nearly 400% in just 10 months. The ride has been very volatile, with a lot of ups and downs, which have given investors many moments of panic in the last year, but in the past month the shares have really sparkled."

I pointed out that "the jury has to remain out on which of the competing companies in PKI will win, but it is sure that one of them will, and that the winner will reap huge rewards. Can it be Baltimore? Possibly, but it could also be one of the other competitors out there. The critical task for Baltimore must be to break into America; if they fail then their lead in the rest of the world will mean nothing."

January 2000 – With Baltimore now listed on Nasdaq, the company raised £96 million through an offer of shares, and announced the acquisition of CyberTrust Solutions from GTE for $150 million.

January 2000 – Stephen Bland, the arch value investor, warned us about falling in love with a share: they won't love you back.

February 2000 – I found that I had committed the cardinal sin. I had fallen in love with one of my investments.

The share price of Baltimore had gone ballistic and I was now sitting on a massive paper profit in just over a year. With the share price hitting a high of £105 (a split-adjusted price of £10.50) my investment at £5 was now up 2000% -- a 20-bagger. This was the stuff of dreams and certainly way beyond my wildest hopes back in January 1999. If I had seen a 20% increase in a year on my investment I would have been happy.

Suddenly, a whimsical investment of a small part of my portfolio had grown into a major proportion and a large amount of money. I was very tempted to sell some shares, but if I had then I would have had big capital gains taxes to pay. Which brings us to lesson number 1: never let tax considerations sway your investment decisions!

February 2000 – Baltimore published its first set of results under its new name. The shares had continued to soar and were now trading at £125 (a split-adjusted price of £12.50). The company had increased in market capitalisation so much that it was now the 70th-biggest company quoted on the London market. The company was sure to be promoted to the FTSE 100 at the next review in March 2000.

During February the shares hit a high of £150 (split-adjusted 1500p).

May 2000 -- The company announced its first quarter results, and also a share split -- to take effect on May 12th 2000. In the UK the shares were split in the ratio of 10:1. On Nasdaq, the American Depository Receipt (ADR) ratio was changed from one share per ADR to two shares per ADR. This resulted in an effective stock split of 10 for 1 on the London Stock Exchange and 5 for 1 on Nasdaq.

Losses before tax in Q1 2000 increased to £7.24 million compared to £6.95 million in Q1 1999. I commented that at this stage it was still very difficult to read a lot into the loss figures: Baltimore is effectively a "concept stock", and we are told not to worry about losses today as they are "all part of the plan".

At the time I wrote that "The company is investing heavily in both sales and marketing as well as research and development in its aim for global domination -- or, at least, towards its objective of becoming the global leader in the provision of e-security infrastructure solutions. Investing in Baltimore is investing in a dream: losses today, jam tomorrow -- at least that is what we all hope!"

Conclusion

After the bursting of the tech-stock bubble the share price has just gone one way: down. Today the shares are trading at about 175p (which is equivalent to a pre-split price of £17.50). Compared to the share price high of 1500p investors have seen their shares lose nearly 90% of their value.

So am I a tech-stock investor in despair? Well, no. During the two years of fun and games I managed to sell some of my shares and realised some significant gains. I still hold a sizeable investment in Baltimore, and I am still confident about the company's future. And if I look back to when I bought the shares at the equivalent of 50p in January 1999 I am still sitting on a paper profit of 250%.

If I had been able to look forward 24 months at the time I originally bought the shares I would have been delighted to see them more than triple in price in just two years. The company has achieved pretty much all that I could have expected from it over that period, and I still believe that it will go on to become a truly great company and a great investment for me. I bought the shares with the intention of holding forever: and while I do wish I had sold all of my shares at the peak of the market last year, I continue to be happy with my investment in the company.

As I said before, investing in Baltimore is investing in a dream: losses today, jam tomorrow. That has not changed, and the share price will continue to be volatile. As an investor in the company I have seen an amazing and exciting two years: let's hope that the excitement continues for many years.

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